House Majority counters Senate offer on oil tax credits
With less than 10 days left in the year’s second special legislative session and a laundry list of critical issues left to tackle, House Democrats offered Senate Republicans their own compromise to tentatively end the omnipresent oil tax debate.
The Democrat-led House Majority coalition issued a statement Friday afternoon saying its members would agree to just end North Slope oil tax credits this year on the premise the Legislature would again revamp the overall production tax next year.
The Legislature overhauled the production tax code in 2013 when both the House and Senate were under Republican control. That legislation, best known as Senate Bill 21, withstood an August 2014 voter initiative to repeal it by a 52-48 margin.
House Majority members said during a Thursday afternoon press briefing in Anchorage that the caucus is open to compromise — just not the deal the Republican Senate Majority offered exactly a week earlier at a similar gathering.
Republican legislators have urged their counterparts to pass legislation to end the state’s North Slope oil and gas tax credit program, the one thing on which both sides and Gov. Bill Walker agree.
Fairbanks Republican Senate President Pete Kelly said he will reconvene the Senate July 10 to hopefully reach an oil tax and credit deal. The current special session called by Walker ends July 16.
The Senate proposal to retroactively cut the payouts as of July 1 sounds good, but according to the House Majority it would not save the state the $1.5 billion over the next decade that Senate leaders purport.
That’s because the version of House Bill 111 the Senate is pushing would simply switch the $150 million per year of tax credits the Revenue Department estimates North Slope operators will earn on average from direct cash payments each year to equal-value tax deductions, meaning about $1.5 billion less in future production tax revenue.
The primary tax credit at the heart of the issue is the 35 percent net operating loss, or NOL, credit available to North Slope oil explorers and producers with less than 50,000 barrels per day of production. It can be earned by companies that end the year in the red as a result of exploration and development costs, low oil prices or a combination of those factors.
House Resources Co-chair and primary drafter of the original HB 111, Rep. Geran Tarr, D-Anchorage, said swapping out the cashable tax credits for like tax deductions would just prolong the oil tax fight.
“Our concern is the industry needs stability,” Tarr said Thursday. “They need to have whatever incentive program — something we actually can afford, which has not happened over the last few years. So if you replace it with something that’s the same amount of money I have every reason to believe that would not be affordable either.”
A year ago Senate Republicans were dead-set against changes to the North Slope tax credits while reluctantly agreeing to phase out credits for Cook Inlet operators. But continued low oil prices translating to less state revenue and political pressures caused them to reverse course on their stance.
The Senate Majority also floated the proposal to “ring fence” deductions, or require they only be used to offset production from the project through which they were earned, a provision suggested by Walker in his pitch for a broader fiscal plan compromise to alleviate the state’s $2.5 billion-plus annual budget deficits.
However, they are still fighting the House Majority on changing the underlying production tax code.
“Creating fair oil tax reform is a priority for our coalition and is vital to any comprehensive fiscal plan,” Anchorage Democrat and House Majority Leader Rep. Chris Tuck said Thursday.
Republicans and industry representatives stress keeping the 35 percent tax deduction is critical to maintaining the viability of future North Slope developments, noting that the ability to deduct expenses or losses from a tax liability is a fundamental feature to nearly any net tax regime, whether it is a personal or corporate income or a severance tax.
The problem with the status quo, according to the House Majority — particularly at current oil prices — is the effective production tax rate doesn’t come close to matching the 35 percent loss deduction. Therefore, the House coalition is pushing for a simple 25 percent net profits production tax with a corresponding 25 percent loss deduction.
While applying deductions to a net profits tax is a nearly universal practice, the percentage of a loss that can be applied to reduce a tax obligation also usually matches the statutory tax rate.
Alaska’s current oil production tax has a base rate of 35 percent, but that is only applicable to oil produced from the state’s large and mature fields at prices in the $150 per barrel range. As prices fall the major oil producers can apply per barrel credits that increase in value as the price falls to lower the effective tax rate.
According to the state Tax Division, the effective production tax rate on legacy oil under current law is 20 percent at $90 per barrel and down to 8.1 percent at $70 per barrel.
Producers operating more recent developments can apply a fixed $5 per barrel credit to reduce the taxable value of their oil regardless of price and are eligible for other tax reductions.
The House Democrats contend their tax proposal would generate about $800 million in additional production tax revenue over the next 10 years and more closely resemble other profits-based tax systems.
Republicans argue the lower tax rates at lower prices are necessary to offset the unavoidably high North Slope operating costs. They also point to increased North Slope production over the past two years — historical anomalies — as proof the current tax structure is working.
According to the Democrats, the state isn’t seeing the benefit of the production boost and won’t in the future with the current tax and oil price regimes because the deductions will evaporate virtually all of the production tax revenue before it reaches state coffers.
Tarr called the Senate’s idea to retroactively end the cashable credit certificates July 1 “unworkable.”
The state fiscal year started July 1, but companies pay their taxes on the calendar year. Additionally, Republican legislators have long said tax changes need to be made prospectively and both version of HB 111 passed by the House and Senate have Jan. 1, 2018, effective dates, which made the July 1 idea a surprise.
Tarr said she was also caught off-guard by the Senate Republican’s June 29 press conference and credit proposal because the sides were talking behind the scenes.
“We had been in conversations and I thought the conversations were really productive,” she said.
The senators stressed at the June 29 press conference that the state is currently accruing a credit liability of about $1 million per day; so ending the program six months sooner could save the state nearly $200 million.
Tarr also chairs the conference committee on HB 111 and thus it is ultimately her decision as to when the committee meets because it is a House bill. Walker added the Senate’s version of HB 111 to the special session call after the two bodies agreed on an operating budget June 22.
Tarr said in a brief interview that she thought there was agreement to raise the gross minimum tax floor to 5 percent from the current 4 percent, which would raise an estimated $45 million per year, as well as consensus on smaller provisions.
The large producers are now paying the gross tax minimum at the current price of less than $50 per barrel. The net profits tax kicks in at about $70 per barrel.
Ensuing negotiations will determine if House members join the Senate back in Juneau next week.
“If we can see some progress in some preliminary discussions I think (holding meetings) would be worthwhile, but it’s very costly for people to go to Juneau and be there if we cant resolve those issues,” Tarr said.
She indicated a desire to have the Legislature’s new suite of oil and gas consultants testify before the conference committee as a means to a public dialogue but said Senate leaders prefer to stick to tradition and use conference committee meetings to formalize what was agreed to in private negotiations.
The Legislative Budget and Audit Committee has contracted with Houston-based oil and gas consultant firms Gaffney Cline and Associates and Palantir USA Inc. It also renewed its contract with Rich Ruggiero, a longtime industry engineer and founder of the oil economics consultant firm Castle Gap Advisors who testified extensively on HB 111 and legislators in both parties generally liked.
Elwood Brehmer can be reached at email@example.com.